(Calculating free cash flows) Racin’ Scooters is introducing a new product and h
ID: 2765992 • Letter: #
Question
(Calculating free cash flows) Racin’ Scooters is introducing a new product and has an expected change in EBIT of $475,000. Racin’ Scooters has a 34 percent marginal tax rate. The project will also produce $ 100,000 of depreciation per year. In addition, the project will also cause the following changes in year 1: What is the project’s free cash flow in year 1?
Without project
With the project
Accounts receivable
$45,000
$63,000
Inventory
65,000
80,000
Accounts payable
70,000
94,000
Without project
With the project
Accounts receivable
$45,000
$63,000
Inventory
65,000
80,000
Accounts payable
70,000
94,000
Explanation / Answer
Net working capital with project=$63,000+$80,000-$94,000=$49,000
Change in working capiatl=$49,000-$40,000
Free cash Flows year 1=EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure
=$475,000(1-0.34)+$100,000-$49,000=$313,500-$51,000=$364,500
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